Presidential Address: - PowerPoint Presentation

Presidential Address: Does Finance Benefit Society? -- Luigi Zingales (2015 AFA Presidential Address) Topics in QF Professor: Phil Dybvig Presenter: Sunny Deng

Abstract Background Happening Solutions Conclusions

Background Dissonance: academics’ view of the benefits of finance vastly exceeds societal perception Questionnaire: 57% disagree that financial innovation boosts economic growth Some truth in all criticism that we cannot see because we are too embedded in our own world

Why care about dissonance? Without fraud  dislike; With fraud  rage (E.g. Ebola v.s . George Soros; private return v.s . social contribution) Lobby in favor of true competitive markets: weakest way Conflicts of interest is not the exception but the rule Money spigot going  seek protection from political power  create more popular resentment  radical backlash Traditional solutions (new regulators)  become a club to consolidate the power of incumbents

New Regulators Federal Reserve (1933): prevent the kind of bank runs that forced more than 5,000 banks to close in the early 1930s Securities and Exchange Commission (SEC) (1934): prevent the stock market manipulations that had prevailed during the 1920s The Office of Thrift Supervision (1989): deal with the savings-and-loan crisis of the late 1980s Public Company Accounting Oversight Board (PCAOB): in response to the Enron and WorldComm accounting scandals Consumer Financial Protection Bureau (CFPB): created because of 2007 and 2008 financial crisis

Happening: Hypertrophic financial sector -- more and more complicated markets in order to win in a competition Creation and growth of junk bond market, option and futures markets, or OTC derivatives Credit to the private sector reaches 80%-100% of GDP, marginal effect of financial depth on output growth becomes negative With noble excuse to receive government subsidy Financial sectors provide much greater opportunities for abuse, and even government takes advantage Fraud: Feature, not Bug

Fraud: Feature, not Bug 15: See http:// www.huffingtonpost.co.uk /2013/02/06/ libor -scandal-outrageous-traders-exchanges_ n_2630945.html.

Duping unsophisticated investors E.g.: Lemon securities E.g.: Packaged with some optional overpriced add-ones Innovation efforts take place in searching for better duping opportunities Financial engineering provides an extremely flexible tool to exploit agency problems Principals are dispersed with little ability to coordinate a move Happening: Hypertrophic financial sector -- more and more complicated markets in order to win in a competition

Solutions – Empirical research? Whistleblower – quite difficult Data not broadly accessible Regulators are risk-averse Treating sources favorable in order to obtain data Ex post cost-benefit analysis – example of payday loans Payday loans: a form of regulatory arbitrage around anti-usury laws Data: 44% less in interest than in 2009 under the conventional payday loan model, saving $41.9 million Facts Fewer borrowers declared bankruptcy Reduction in the excessive entry

Solutions – Theoretical research! Rigorous More realistic, more relevant Simple Facilitate accountability  reducing lobbying cost and easier for the public to monitor Not mouthpiece of interest of those political economists Political economists: embed the lobbying pressure of powerful incumbents Not the forefront of our economic analysis

Solutions – Teaching! Why pay attention to teaching? Prevailing business culture in the banking industry undermines honesty Teaching of economics makes students more selfish and less concerned about the common good Ways to improve Not relegate prescriptive analysis or poorly attended ethic courses Underscore how violating most social norms has a negative effect on reputation Social norms are crucial to the flourishing of a market economy

Paper’s conclusion Current situations  Gap Too proud of the technical achievements and economic successes of our discipline and too complacent of its shortcomings Between our self-perception and the outside perception of our role in society Fill the gap Better explain and document the contribution of finance to society Appreciate that some of the criticisms that have been raised are well founded Guard against the risks of becoming simple mouthpieces of the financial industry With rule of law is respected and expected to be respected in the future

Personal thoughts Motivation of writing this paper Professionally analyze the reality aspects Give confidence to people who are unfamiliar with this industry Identifying the realities and problems rooted deeply Using question marks as titles Providing enough daily examples, collected data, studies or research results in other papers

Thanks for listening! Q&A